Personal financial statements are your roadmap to guide you from where you are today, to where you want to be tomorrow. They also provide fixed points of reference from which you can measure your progress over time. It’s very difficult to achieve financial fitness and stability if you don’t have a baseline of where you are today and measure your progress every 6-12 months. It doesn’t take a lot of time, but like everything else, it takes discipline and consistency to chip away every day towards your financial fitness goals.

Personal Financial Statements

There are two basic personal financial statements that everyone should prepare at least once each year: the cash flow statement and the balance sheet. Many people would go to a financial advisor to do this, but I’m a firm believer in self financial education and making sure you know how to do this on your own. It’s not difficult and if you rely on someone else to do it, you’ll find excuses to not schedule the appointment, holidays get in the way, and before you know it, it’s been 18 months since you updated your basic financial statements.

This process is a critical first step in financial planning. Tracking your financial position and progress gives you a great feeling of control — you know where you are going financially. It helps you to make wise decisions about financial matters, such as saving for a down payment to buy your first home or possibly your first investment rental property! So let’s begin with the first statement, your Cash Flow Statement.

Cash Flow Statement

“Cash Flow” is how you spend your money. A cash flow statement is an ongoing financial document which tracks sources of income, uses of income, and the difference between the two. If your cash flow is NEGATIVE, you are spending more than you are making each month. If your cash flow is POSITIVE, you are spending less than you are making each month – – – you want to achieve POSITIVE cash flow and it’s easy to do if you pay yourself first! I’ll talk more about this below.

If you keep a budget, you are, in essence, keeping a running cash flow statement. By tracking your cash flow on a monthly basis you will be better prepared to meet your financial needs. I like to use the 20/30/50 rule to always be in a positive cash flow position. Here it goes.

20% – to achieve your intermediate and long term goals, pay yourself first 20% of your take home pay – so if you bring home $2000/month after taxes, pay yourself $400 first and put it into your savings account or 401k or IRA, etc. This 20% is about investing in YOU to achieve financial fitness. Systematic planning and saving 20% will help you meet the financial objectives that others cannot. The 20% also supports your financial emergency fund of 3-6 months of your salary in case of an emergency instead of going into debt.

30% goes towards variable short term expenses – your day to day expenses and standard of living items such as food, transportation, child care, entertainment, etc. So if you bring home $2000/month after taxes, this means you have a budget of $600/month for food, gas, entertainment, etc.

50% goes to fixed recurring expenses – periodic payments for items such as mortgage/rent, insurance premiums, tax payments, medical and dental expenses, utilities, phone, etc. So if you bring home $2000/month, this would leave you with $1000 budget for rent/mortgage, insurance, utilities, phone, car payment, etc.

That’s my 20/30/50 Cash Flow statement. If you can put together a budget by paying yourself 20% first, you will always have a positive cash flow statement and chipping away each month towards your financial fitness goals. It might seem difficult at first, but look at where your monthly expenses are going. Do you need that $250/month car payment, or the $4 Starbucks each day (adding up to $120/month!) or the $80/month cell phone bill? Like anything else in life worth doing, it’s not easy. If it was, everyone in America would be achieving financial fitness and stability. But the reality is, 31% of working Americans have no retirement savings and 53% of Americans could not cover a $400 emergency expense without borrowing the money. Understanding your personal cash flow statement and managing it on the positive side is the only way to achieve financial fitness and stability over time.

Balance Sheet

Your balance sheet is a snapshot of your personal net worth. I tend to check my personal balance sheet every 6 months as a gauge to how my savings and investments are doing, but also to make sure I’m not taking on too much debt with credit cards, car loans, etc. that are pushing my net worth in the wrong direction. Your Balance Sheet is simply your Total Assets – Total Liabilities = Net Worth.

Total Assets: A list of current estimated value of your assets might include the following: cash in banks and money market accounts, cash surrender value of life insurance policies, IRA & Keogh accounts, pension and 401(k) accounts, real estate, and personal property such as cars, boat, RV, jewelry, etc. Add them up and you’ll have a figure that represents your Total Assets at the moment.

Total Liabilities: Next, make a list of your liabilities, which might include the following: mortgage, bank loans, car loans, credit card account balances, taxes owed, college loans, etc. Add these up and you’ll have a list of your Total Liabilities. Hopefully, it’s less than your assets!

Your Net Worth: Your personal net worth is the difference between your total assets and your total liabilities.

Conclusion

As the control you gain through cash flow management turns into increased savings, your success is reflected in an increasing net worth. The process of preparing personal financial statements will bring you closer to controlling your personal finances and accumulating sufficient assets to meet your financial fitness and stability objectives. One way I’ve achieved this is by including real estate in my portfolio by moving from Renter to Owner to Investor. It doesn’t happen overnight, but you can achieve anything if you focus. Notice I didn’t say you could achieve Everything, but rather Anything if you know where you are today and have a plan to get Anything you want, such as financial fitness and stability.